CDS Index Series, Remaining Maturity, and Liquidity
Summary
CDS index series begin with constituent default swaps set to a five-year tenor. As time passes, the series’ remaining maturity declines, so a contract entered into later has the time left on that series rather than a fresh five-year term. This is the key distinction between a series’ original tenor and its current time to maturity.
New index series are introduced about every six months. The newest series, which matures five years from its launch on an IMM date, is generally the most actively traded. Older series have progressively shorter remaining maturities and tend to be less liquid, with wider bid-ask spreads. The discussion cites the London Whale episode as an example involving trading in older index series, but gives no detailed analysis of that trading or the mechanics of CDS valuation. Maturity conventions and liquidity can vary by index and market practice, so the explanation is an introductory overview.
Key ideas
- A CDS index series starts with constituent swaps set to a five-year tenor.
- A contract on an existing series has the time remaining until that series matures.
- New index series are typically launched every six months.
- The newest series is usually more liquid than older, off-the-run series.
- Older series can have wider bid-ask spreads, making liquidity relevant to trading.
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# CDS Indices Query # CDS Indices Query I'm just getting into Credit derivatives at the moment but I'm having a bit of trouble with the technicalities of CDS Indices(CDX etc.) My question is. Given that CDS indices have fixed lifetime, is it the case that (i) All contracts entered into have the same time to maturity as the index e.g 5 years or rather (ii) Whenever the contract is entered into e.g buying X notional protection on the index, then the time to maturity of the contract is the time remaining on the index lifetime. For example, if the index for 5yr CDS launched last year then any contracts entered into now will have a time to maturity of 4 years. Apologies if this is a basic question! ## Answer by AlRacoon (score 0, accepted) https://quant.stackexchange.com/a/37500 It is the latter. There is a roll down. The indices comprise default swaps that have a 5Yr tenor on index creation date. ## Answer by Dimitri Vulis (score 3) https://quant.stackexchange.com/a/43583 Every 6 months, there is a new series of an index (usually with slightly different names). The "on the run" series (maturing on IMM date 5 years from now) is the most liquid. "Off the run" series (maturing on IMM dates 4.5, 4, 3.5, etc years from now) are much less liquid with wider bid-ask spread than on-the-run one. In 2012 Bruno Iksil (aka London Whale) lost lots of money for JPMorgan trading off-the-run series of IG index. A detailed discussion of what he did and how indices work can be found here https://archive.org/stream/555534-jpmorgan-report-on-trading-loss/555534-jpmorgan-report-on-trading-loss_djvu.txt . I found it very educational. Also https://www.hsgac.senate.gov/imo/media/doc/REPORT%20-%20JPMorgan%20Chase%20Whale%20Trades%20(4-12-13).pdf explains what he did.
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